2. Disclaimer
This presentation does not constitute or form part of and should not be construed as, an offer to sell, or the solicitation or
invitation of any offer to buy or subscribe for or underwrite or otherwise acquire, securities of Eskom Holdings SOC Limited
(“Eskom”), any holding company or any of its subsidiaries in any jurisdiction or any other person, nor an inducement to enter
into any investment activity. No part of this presentation, nor the fact of its distribution, should form the basis of, or be relied
on in connection with, any contract or commitment or investment decision whatsoever. This presentation does not constitute
a recommendation regarding any securities of Eskom or any other person.
Certain statements in this presentation regarding Eskom‟s business operations may constitute “forward looking statements.”
All statements other than statements of historical fact included in this presentation, including, without limitation, those
regarding the financial position, business strategy, management plans and objectives for future operations of Eskom are
forward looking statements.
Forward-looking statements are not intended to be a guarantee of future results, but instead constitute Eskom‟s current
expectations based on reasonable assumptions. Forecasted financial information is based on certain material assumptions.
These assumptions include, but are not limited to continued normal levels of operating performance and electricity demand
in the Distribution and Transmission divisions and operational performance in the Generation and Primary Energy divisions
consistent with historical levels, and incremental capacity additions through our Group Capital division at investment levels
and rates of return consistent with prior experience, as well as achievements of planned productivity improvements
throughout our business activities.
Actual results could differ materially from those projected in our forward-looking statements due to risks, uncertainties and
other factors. Eskom neither intends to nor assumes any obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
In preparation of this document we used certain publicly available data. While the sources we used are generally regarded
as reliable we did not verify their content. Eskom does not accept any responsibility for using any such information.
2
4. MYPD3 Electricity tariffs are decided and
The beginning of a regulated by the National Energy
public process Regulator (NERSA), an independent
body.
The current three-year tariff cycle ends in
March 2013.
Eskom must apply now for the new tariff
cycle, to allow time for NERSA to elicit
public comment and conduct public
hearings – we encourage all to engage
with our application.
4
5. MYPD3
Application aligns
with 2012 State of
the Nation address “In support of economic growth
and job creation”
“We need an electricity price path which
will ensure that Eskom and the industry
remain financially viable and sustainable,
but which remains affordable,
especially for the poor.”
5
6. Our application ensures we can
cover the costs of supplying the
electricity needed to power
South Africa and invest in the future.
WHY
the tariff increases?
6
7. Our application ensures we can
cover the costs of supplying the
electricity needed to power
South Africa and invest in the future.
Secures the resources to run existing operations
WHY
(coal, maintenance, human resources) and support the the tariff increases?
financing of new capacity, as well as to introduce
independent power producers, while protecting the poor.
7
8. Executive summary
• A stable supply of electricity is essential to power economic growth
and improve the quality of life
• Current electricity prices do not cover the full costs of supplying
electricity – application continues the migration to cost-reflective tariffs
• We recognise the impact of tariff increases on the economy and
households, especially small business and the poor
• Application seeks the right balance for the country
• A five year price path to smooth the impact and provide certainty
• We have looked hard at our costs for efficiency
• Coal and other operating costs have been contained in the application
8
9. Executive summary
• We have provided for the costs of using and replacing our assets and
servicing debt raised to fund investment in new infrastructure for SA
• Application includes introduction of new independent power producers
in all three phases of the Department of Energy‟s renewable energy
programme (3725 MW) and the DoE‟s peaker plants (1020 MW)
• Average annual increase of 13% to meet Eskom‟s needs over five
years, plus 3% to introduce new independent power producers – a
total of 16% per annum
• We have included a long term price path to implement new capacity
beyond Kusile, but this is not included in our revenue requirement for
the five years
9
10. Why the tariff increases?
Eskom and the industry need to recover
the cost of producing electricity, which
includes operating costs
(coal, maintenance, employees) as well
as the costs of financing new capacity.
Cost-reflective tariffs ensure Eskom and
the industry are sustainable and do not
burden taxpayers or future generations.
Provides confidence for lenders and
investors.
Protects the poor through targeted
subsidies.
10
11. Why the tariff increases?
Economic models show it is better and
fairer for tariffs, not taxes, to pay for
electricity.
The „right price‟ signals to use energy
efficiently, so less need to invest in new
generating capacity.
Supports investment by independent
power producers and by Eskom.
NERSA‟s rules allow only prudent and
efficient costs – so Eskom must spend
South Africa‟s tariff money wisely.
11
12. We assume sales growth of 1.9% on average.
A country pact which keeps coal cost increases to
no more than 10%
An energy conservation scheme to support keeping
the lights on.
WHAT
A five-year price path – a gradual move to cost- do we need?
reflective tariffs.
12
13. What the tariff pays for
Primary energy
Returns increasing by
improve from 8.6% a year (coal
0,9% to 7,8% @ 10% a year)
Depreciation
increasing at
10% a year.
IPPs increasing
IDM increasing
by 42% a year
by 5% a year
(in MYPD3
(in MYPD3
period).
period)
Operating
costs
increasing by
8% a year
The regulator allows us to apply for revenue to cover our costs –
these are the cost components which are allowed 13
14. What do we need?
Eskom is acutely aware of the impact of
tariff increases on the economy,
particularly poor households.
Need to balance objectives – secure
supply of power, financially sustainable
industry, economic growth and job
creation.
Protection for the poor, through tariff
structure with transparent cross
subsidies.
Economic policy should set out protection
for specific economic sectors.
14
15. Average increases of 13% over five
years for Eskom‟s own needs, plus
3% to support the entry of new
independent power producers,
giving a total of 16%
WHAT
do we need?
15
17. Primary energy
Primary energy
Coal is 56% of the total primary
energy cost.
Coal cost increases have been
double digit due to aging mines
and growing competition for SA
coal from e.g. India.
Country pact needed to contain
coal cost increases.
18. Generation
Generation
Generation revenue requirement
represent about 75% of the total
revenue. This includes the cost
of generating power from
existing assets and of managing
the new assets we need.
Most of our power stations are
in mid-life and increasingly
costly to maintain:
60
50
40
Years
30
20
10
0
19. Independent power producers
IPPs
Eskom committed to connecting
new private sector players to the
grid.
Eskom supports commitment to
reducing carbon emissions.
Will buy power from new
renewable energy producers
procured by DoE.
The total IPP costs increase
from 125 c/KWh to 232c/kWh
over the period compared to
Eskom‟s generating cost of
23c/kWh growing to 30c/kWh.
Solar PV averages 239c/kWh
and wind 174c/kWh.
Already signed more than 1000
MW of independent power, at
average 77c/kWh.
20. Transmission
Transmission
Transmission revenue
requirement represents about
7% of total revenue.
Eskom‟s transmission grid is
the size of western Europe,
reaching across SA.
The system is under strain and
the system operator manages
the challenge of keeping the
.lights on from minute to
minute.
21. Distribution
Distribution
Distribution revenue
requirement represents about
18% of total revenue.
Eskom has a total of almost
5 million customers.
Expanding and upgrading
distribution networks to improve
quality of supply to end-users.
22. Customers
Customers
We supply electricity in bulk to
184 municipalities, who sell to
their residential and business
customers.
Directly supply SA‟s large mines
and industries, and 4.5 million
households (mostly on pre-paid
electricity).
Cross-subsidies in the tariff
structure to cushion poor
households.
23. Construction
Construction
Eskom‟s investment in
infrastructure totals R337bn
over five years, including
capacity expansion, upgrading
and refurbishment.
Medupi and Kusile build costs
are in line with international
benchmarks.
On completion, the committed
build programme will add
11 356MW to Eskom‟s capacity.
It will add more than 9 004km
of new high voltage
transmission and 41 645 MVA
of subs-stations.
Creates local jobs, local skills
and local supplier industries.
24. Eskom‟s contribution to life in South Africa
More than 35 000 people
currently employed at the Almost 12 000 learners in
new build projects. the Eskom skills
development system by
March 2012.
R72bn contribution to New build projects placed
BBBEE at 31 March 2012. more than R75bn of
contracts with SA suppliers
(63% of total).
One of the world’s largest
energy saving programmes,
with 57m energy saving
bulbs and 285 000 solar
geysers. Eskom has connected
4.2m households since 1991.
25. WHAT
are the tariffs? Eskom applies for a revenue requirement
which then must be translated into specific
tariff increases for each category of
customer.
Targeted protection for the poor means
residential customers will face lower
average increases than large industrial
and mining customers.
25
27. Cost of supply is higher for small customers
Though small
customers pay a
higher price per unit,
the cost to supply
them is much higher
than it is for large
customers . Hence
large customers pay
a price which is
more than it costs to
supply them,
thereby subsidising
the rest
27
28. Protection for low income households
• Existing mechanisms include
• Inclining Block Tariff (IBT) - meant lowest block experienced below-inflation tariff
increases during MYPD 2
• Free basic electricity of 50kWh/month for indigent customers
• Support for energy efficiency
• IBT challenges:
• Complex to understand
• Does not cater for multiple dwellings on one property
• Not targeted: high consumption customers also benefit
• Results in unsustainable increases in cross-subsidies from large Eskom users
• Eskom proposes to simplify and refine the current residential tariffs:
• For low-consumption prepaid customers (Homelight 20A), replace the current IBT
with a single lifeline tariff for the poor
• For low to medium-consumption prepaid customers (Homelight 60A), a revised IBT
with only two blocks
• For high-consumption residential customers (Homepower suite of tariffs), re-
introduce a fixed-charge tariff
29. Average additional monthly payment by
residential customers
Eskom residential Homelight Eskom residential Homelight 60A
20A (low usage) (medium to high usage)
2012/13 2013/14 2012/13 2013/14
100kWh payment R 68 R 68 R 68 R 68
100kWh increase R0 R8 R0 R 14
Total R 68 R 76 R 68 R 82
400kWh payment R 367 R 367 R 367 R 367
400kWh increase R0 -R 27 R0 R2
Total R 367 R 340 R 367 R 369
1000kWh payment R 1,023 R 1,023
1000kWh increase R0 R 167
Total R 1,023 R 1,190
3000kWh payment R 3,467 R 3,467
3000kWh increase R0 R 1,214
Total R 3,467 R 4,681
29
32. Eskom‟s funding model, derives from both tariffs
and other funding sources
Revenue
Borrowings Equity
• The long term sustainability of an electricity Linkages between regulation and funding
supply industry depends on an appropriate
regulatory and funding model • Lenders and credit agencies require
sound regulatory approaches to cost
• This requires a holistic and integrated recovery
approach to:
• Government loans and guarantees
• Revenue (tariffs) depend on long term regulatory certainty
• Borrowings ensuring Eskom‟s ability to repay debt
• Equity
• Equity in the form of retained earnings
• The focus of the regulatory model is on can only come from a strong (regulated)
revenue through tariffs revenue base
32
33. The cost components of MYPD3
Eskom applies for revenues to cover its expected costs
NERSA’s rules set out which costs are allowed
Primary
Energy Return
Operating
(incl IPPs
costs
IDM Depn on Revenue
imports & assets
DMP)
R355bn
(R328bn + R78bn R270bn R13bn R185bn R187bn 16%
R27bn) 42% 8% average 5,0% 10% moves from
average 0.9 % to average
8,6% increase average average
average increase increase increase 7,8% ROA increase
increase
Return on assets = % cost of capital allowed X depreciated replacement asset value
Price levels 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18
Nominal c/kWh (13% X 5) 61c/kWh 69c/kWh 78c/kWh 88c/kWh 99c/kWh 112c/kWh
Real (2012/13 terms) (13% X5) 61c/KWh 65c/KWh 69c/KWh 74c/KWh 79c/KWh 84c/KWh
Nominal c/kWh (16% X 5) 61c/kWh 71c/kWh 82c/kWh 95c/kWh 110c/kWh 128c/kWh
Real (2012/13 terms) (16% X5) 61c/KWh 67c/KWh 73c/kWh 80c/kWh 88c/kWh 96c/kWh
33
35. MYPD3 revenue application
• Returns – most of this goes to
cover interest costs
• Equity – After paying for
interest from the returns the
balance is equity
• Operating costs escalate at
approximately 8% a year,
including efficiency savings
• Capex: completing new build
projects and maintaining
existing networks and current
fleet of power stations will cost
R337bn.
• Eskom Primary energy
average increase of 8,6% a
year and 10% a year including
IPPs.
35
36. Primary energy costs increase
• Generation primary energy costs increase
marginally above inflation at 8,6% on
average, but at 10% if independent power
producers (IPPs) are included
• Success depends on coal cost increases of
no more than 10% on average
• Low demand assumption of 1.9%
contributes to low primary energy costs
• Any upward movement in demand must be
contained by Energy Conservation Scheme
• IPPs – included are the DoE renewables
programme of 3725MW, and Peaker of
1020MW
• Further IPPs – include Medium Term
Power Purchase Programme and short
term purchases
• Imports – mainly from Cahora Bassa
36
37. Operating costs will show efficiency gains
• Operating costs include employee and
maintenance costs as well as Integrated
Demand Management
• Drop from 2012/13 to 2013/14 is due to IDM
costs of R7bn accelerated in and dropping off
in 2013/14
• Eskom has challenged itself to achieve
savings of R30bn over five years
• Maintenance will not be compromised – it
remains a priority
• Integrated demand management is essential
to ensure security of supply and moderate
primary energy costs (R13bn included in the
MYPD3 period)
• Employee costs are kept within tight control
• Benefits of Eskom‟s „Back to Basics‟
programme will be seen in operating cost
performance
37
38. Historical cost depreciation recovery leads to price
shocks at replacement
„Constant‟ Rand billion Historical cost method
Replacement
No change in
levelised cost of
electricity at
replacement
38
39. Depreciation costs see double-digit increase
• Escalating at above inflation due to
application of the principle of depreciated
replacement valuation
• Aligned to Electricity Pricing Policy
(2008)
• Critical factor to move to cost-reflective
price levels
• Covers cost of „consuming‟ and
ultimately replacing assets
• Builds up retained earnings to help fund
future expansion as per IRP 2010
• Allows correct price signals on true cost
of scarce resources
• Revaluation methodology supported by
rating agencies
39
40. Returns migrate from negative base
• Return caters for both debt and
equity costs ROA
7.8%
• Positive returns generated totalling
R187bn over MYPD 3
• Real returns are below NERSA
target of 8.16% and reach 7.8% by
2018.
• Returns are below Eskom WACC of
8,31%
• After paying for finance costs of
R140bn the remainder of R47bn is ROA
attributable to equity returns 0.9%
• Eskom‟s revenue sacrifice had it
requested 8,31% is R209bn during
MYPD3
40
41. Understanding the return components
between interest and equity
Items 2014 2015 2016 2017 2018 Total
R’m MYPD3
Return on
Assets (1) 7 271 14 643 31 187 51 878 81 885 186 863
Interest (2)
21 198 26 503 30 223 31 824 30 619 140 366
Equity portion
(1-2)
(13 927) (11 860) 964 20 054 51 265 46 497
Strictly Confidential – Not For Further Distribution
42. What the rating agencies say about Eskom
Quality of Credit Moody's S&P
Strengths: Gilt Edged Aaa AAA
Aa1 AA+
• Dominant market position for Very High Aa2 AA
Investment Grade
the next few years Aa3 AA-
A1 A+
• Continued government support Upper-Medium A2 A
and the potential for A3 A-
government to provide Baa1 BBB+
additional financial support if Medium Grade Baa2 BBB
necessary Baa3 BBB-
Ba1 BB+
Weaknesses:
Sub-Investment
Questionable Ba2 BB
Grade
Ba3 BB-
• Eskom‟s highly leveraged
B1 B+
position, given the build
programme Poor B2 B
B3 B-
• Regulated tariffs will not be fully
cost-reflective in the short term Headline Rating
Standalone Rating
• Regulatory risk and
government‟s plan to introduce
IPPs
• Weak credit metrics on funding
and liquidity
42
43. Financial sustainability once stand-alone
investment grade is achieved in 2018
• Both ratios must meet
criteria to qualify for
stand-alone investment
grade
• Eskom currently relies on
government support for
investment grade rating
• Majority of funding for
approved new build
secured (almost 80%)
• Investment grade status
necessary to secure the
balance of funding, and
critical for long-term
expansion post Kusile
43
44. Long term scenarios relating to IRP 2010 capacity
Two long term scenarios modelled
ESKOM (assumed) IPPs (assumed) IRP 2010
- Scenario 1 - Eskom builds 65% of TECHNOLOGY
MYPD 3 POST MYPD 3 MYPD 3 POST MYPD 3 TOTAL MWs
IRP2010 (28 737MW), IPPs 35% (16
Nuclear 0 9,600 - - 9,600
491MW).
Coal 0 4,368 2,442 - 6,810
- Scenario 2 - Eskom builds 100% of Gas 0 3,269 672 2,300 * 6,241
IRP2010 (31 437MW), IPPs (13 Wind 0 5,200 2,547 400 8,147
791MW). Solar and CSP 0 6,300 3,321 - 9,621
Other renewables 0 - 173 - 173
- IPPs 13 791MW comprises:
DoE peaker - - 1,008 - 1,008
- 9 210MW DoE assumption Cogen - - 1,019 - 1,019
Import Hydro - - - 2,609 2,609
- 1 020MW DoE Peaker Capacity (MW) - 28,737 11,182 5,309 45,228
- 2 609MW imports
65% 35%
- 960MW Cogeneration 16,491MW
44
45. Long term scenarios show pricing implications
TARIFF IMPLICATIONS
300 30%
25% 26%
25%
250 20% 20% 20% 20% 20%
Nominal % increase
16% 20%
200 15%
9% 9% 9% 9% 9%
c/kWh
6% 6% 10%
150 4% 5% 5%
4% 5%
100 0%
-1% -5%
50
-8% -10%
MYPD 2 MYPD 3 MYPD 4 MYPD 5 & BEYOND
0 -15%
10/11
12/13
14/15
16/17
18/19
19/20
20/21
21/22
22/23
23/24
24/25
25/26
26/27
27/28
28/29
29/30
11/12
13/14
15/16
17/18
30/31
Nominal price % increase (RHS) Nominal standard tariff - c/kWh (LHS)
Real standard tariff - c/kWh (LHS) IRP 2010 - real c/kWh (LHS)
• Assume Eskom builds 65% of new capacity to 2030, or 29000 MW , while IPPs build
16000 MW
• Price path required is 20% for 5 years (MYPD3) followed by 9% for 5 years (MYPD
4) and inflation thereafter
45
47. Eskom is committed to open and on-going
communication throughout the process
PROCESS
We urge all stakeholders to participate in
We urge you to Nersa‟s consultation process
engage with our
application The quality of debate will shape the quality
of the outcome
Submission to On-going Eskom Public NERSA New tariffs are
NERSA communication Hearings finalises price implemented
increases
17 October 2012 October-January January February 2013 April/July 2013
2013
47
48. Conclusion
• A stable and secure supply of electricity is essential to support economic growth
and development , now and into the future
• Tariffs are the fairest and most efficient way to pay for electricity , and ensure the
industry invests in the infrastructure needed to deliver the electricity we need
• Prices must cover the full cost of producing electricity from existing and new
assets - ensuring Eskom and electricity industry are financially sustainable
• This must be balanced with the impact of tariffs on the economy and poor
households
• We have looked hard at our costs and committed to R30 billion in savings
• Proposed increase of 13% to cover Eskom‟s costs, plus 3% to introduce new
independent power producers, giving a total of 16% for each of the five years
• Including new build beyond Kusile would raise this to 20% a year over MYPD3
48
49. Conclusion
• Eskom is committed to move towards a cleaner energy mix, and to improving energy
efficiency in its own operations and those of its customers and stakeholders
• Eskom cannot do it alone : we welcome the involvement of the private sector to
support us in meeting South Africa‟s energy needs into the future.
• We must ensure that solutions to meet future energy needs will ensure the tariff
trajectory is affordable and support the aspirations of Government policy on job
creation and local supplier development.
• Decisions need to be made soon on implementing the Integrated Resource Plan The
funding of the plan requires serious consideration.
• Regional options must be considered, in southern and central Africa, which could
help us meet our future energy needs and contribute to regional development
• We must look at potential game changers, such as gas (natural or unconventional).
• Eskom‟s application strikes the optimal balance for South Africa - we urge you to
engage with it.
49
